Shankara is a very working capital intensive operation and requires a lot of it. Currently, its internal cash flows are not sufficient to cover these needs and thus, will have to be funded by additional debt or additional equity.

It would be more prudent for it to scale down its operations than risk stretching its balance sheet further. Its return ratios are fairly good uptil this point but are going down as it seeks to grow. I don’t think it can handle any more debt on its balance sheet and will certainly face issues servicing it going forward.

The stock has fallen 72% from 52 week high. But still trades at a market cap of 1527 crore and a PE of 23!.
As per an old management interview, middle class home buyers, home contractors and small builders are the major customers. In my opinion, these people look to buy cement from place x, steel from place y, tiles from place z, etc. Everything under one roof (which apparently is shankara’s moat) is not an important factor.

After Amit Mantri twitter pointing to some potential issues I try to analyse potential issue. One thing which don’t gel well with retail story is company claim that it’s rent is less than 1 perc of its retail turnover. My guess is even in outskirts of cities and tier 1 and tier 2 and tier 3 cities rent in India is quite high and not likely to cost less than 5 percentage of retail sell unless it is company owned which is not the case. My guess is that company was into steel processing and latter projected itself as multiple construction retail chain however it is in begining stages of this transformation and as this retail story catches up with market they played it well and started doing some acquisition of stores to feel the gap. It seems company do projected false story to investor even though idea of it transforming into retail stores may be excellent.

They started buying since March at 1700/1800 levels…bought a bulk in march/april at such high valuation.
Recent buy is at 700 odds.
And this guy Akash Prakash of Amansa seems to be so overconfident while picking valuables.
I wonder if we really need to trust these big guys.

In India corporate governance issue run very deep. MD of this company is IIM Ahmedabad alumni and atleast in TV channels and concall come across as a intelligent sounding business man however whole retail story of Shankara is filled with inconsistency and trying to confuse investors through false projection. In India even after issues come to light promoters keep narrating false stories to confuse and trap new investors. I fell to understand what promoters gain by doing this kind of manipulation may be small amount of money but if they have focussed on executing this idea in fair manner they may have become homedepot of India or likes but insanity and greed has not limit.

Fraud is not easy thing to judge completely just based on available public information otherwise how can market give a market cap of close to 1 billion US dollar for a story stock without much real retail business. There is no need for me to go into details few parameters is enough to reach this conclusion.
(1) How can retail chain has rental cost of only .8 perc of revenue in India. Is real estate so cheap in Bangalore .
(2) If company has success n profitable retail shops than what is need to acquire other retail chain than just opening its own retail chain which cannot cost more than 1 cr per store in any case.
(3) If concall of company is carefully listened than claim of management are at odds with each other at different point of time.
Rest it is your money and you are free to keep invested if you are convinced. But it appears a dude company where facts don’t add up for me

Cant comment on management intent but perhaps the drop in share price has been equated with management intent.

In my view, the problems of Shankara are operational in nature and the root cause is mismatch in working capital cycle with cash flow leading to a debt buildup. These issues are not beyond repair but will take time to rectify. It cant be denied though that the balance sheet has been stretched and maybe needs to be recapitalized in the near term.

Scaling down operations, while important at this time, comes with its own set of issues. Its a tricky catch-22 situation and hopefully the management will come out of it.

Chain stores have good economics in general and what needs to be seen is the reduction in the working capital cycle. Currently its 75 days. Maybe a 45 day cycle would change its fortunes.

The stock, which was trading at ₹1,945 in April, closed at ₹579.60 on Wednesday. In the past 15 days, almost all brokerages have cut their target price by up to 60% and EBITDA by 25% for next two years after the company changed its business strategy of achieving higher revenue growth in retail segment at much lower margins.

“In the near term, this change in the business strategy is likely to result in significant earnings reduction and we believe that positive impact of these changes is likely to be reflected after 2-3 quarters,” said Teena Virmani, analyst, Kotak Securities. “We also reduce our valuation multiples for the retail segment owing to decline in margins, earnings growth as well as lower return ratios as against our earlier expectation.”

On the business update call on November 20, 2018, management provided further inputs on its new strategy, which aims at improving balance sheet but with a sharp reduction in business margins. It guided FY19 revenue for the retail segment to be about ₹1,500, implying about 25% growth compared with FY 2018.

Kotak Securities has reduced the target price of Shanakar Products from ₹1,552 to ₹620 while Emkay Share & Stock Brokers which as a target price of ₹2,155 has suspended the coverage on the stock. Most of the other brokerages also have halved their target price in the last two weeks.

“Given the rising business concerns and a lack of clarity from management, we are suspending our coverage on the stock,” said a note by Emkay Global.

The reduction in margins to 6-8% in retail segment is beyond expectations and this is leading to a sharp downward revision in the earnings of the company going forward, said analysts.

“We cut our FY19 and 20 EBITDA by 14% and 19% to factor in this margin weakness and believe that uncertainty about customer response to Shankara’s changed business model would weigh on performance” said Avi Mehta, analyst, IIFL.